The Tail Can’t Wag The Dog

Before I went into consulting I was the VP in charge of the supply chain at a big consumer products company, and I used to have a pretty standard speech I would give to new suppliers and would be suppliers. I told them that Walmart was the big dog at the end of the supply chain, and they set the rules. As a result, I was not particularly interested in the suppliers wants, needs or policies.

Walmart paid us in 60 days, so the suppliers would be paid in 60 days; Walmart accepted returns for just about any reason, so I would return their components when the goods came back from Walmart regardless of the reason; Walmart expected us to ship within a couple of days of the receipt of their order, so our suppliers had to provide the same lead times; and if Walmart gave us a 2% price increase, they would get a 2% price increase. In exchange for all of us following Walmart's rules, Walmart would sell a tremendous volume of our product, which meant they would move a tremendous volume of their components. The arrangement between my company and theirs was pretty much non-negotiable because our relationship with Walmart was non-negotiable. Those were just the rules of this particular supply chain and they could take it or leave it. If they didn't like those rules, there were certainly other supply chains out there operating by different rules and they were welcome to go participate in one of them.

The underlying principle was that each participant in the supply chain had to increase their profits by improving their own performance – eliminating waste from their processes; and the players in the supply chain should not expect to become more profitable by taking advantage of each other.

There was always a great deal of howling and whining from the suppliers – especially the small ones, as well as from the big ones that had no concept of lean. They wanted to operate within their own four walls in whatever manner optimized their business, and expected the rest of the supply chain to compensate for their limited capabilities. Whether their inability to meet the terms was due to lack of size and resources, or due to parochial management, I had little sympathy. You don't get to play in the big leagues unless you have big league capabilities – you don't get Walmart scale unless you have made the investment of effort and money to operate at that scale.

What prompted me to go on this particular tirade is an article about a company called Government Suppliers & Associates, which makes and distributes uniforms and so forth to government agencies. They are formally protesting to the Government Accountability Office that the TSA is open to bids from Mexican companies, rather than buying strictly American. At issue is whether NAFTA trumps "Buy American" in the law. I say to Government Suppliers & Associates: So you have to compete with low labor cost producers? Welcome to the big leagues. The 99% of American manufacturers that are not government suppliers wish they had someone in Washington whose skirts they could hide behind when challenged by foreign competition.

More significant, GS&A is complaining that the TSA"uniform contract bundled manufacturing, customer service, warehousing and distribution." In other words, the TSA is looking for a comprehensive supply chain manager – not just a shirt maker. GS&A's President, Mike Frisbey, is protesting that such a customer requirement is terribly unfair – that "It's all designed to favor large business over small". This is a common complaint from small manufacturers who want to make money in government supply chains, but will not or cannot provide the one stop shopping capabilities the government agencies often need. He is looking to use the authority of the Government Accountability Office to compel his customer to allow him to work within the little business box GS&A has carved out for itself.

GS&A, and any supplier insisting that they should be allowed to define the scope and rules of their participation in whatever supply chain in which they would like to operate are deluding themselves. That is akin to me demanding the right to play in the US Open Golf tournament, then demanding the right to play from the ladies tees because I am not good enough to drive from the pro tees.

The customer calls the shots. Any manufacturer believing that point is negotiable, or thinking they have some inherent right to do business on their own terms is doomed. The tail is never allowed to wag the dog, and that is Supply Chain 101.

Comments

I agree with you that the customer calls the shot. I also agree that the world is flat and that if a domestic supplier cannot be truly competitive with an import supplier on all counts (speed, cost, quality, service) that they shouldn’t expect to get the business as a “Buy American” entitlement.

From my experience selling to “Big Gorilla” customers (Walmart, US Govt, Home Depot, Boeing, Applied Materials, etc), it is not uncommon for such customers to demand a lot from the supply chain. Many supply chain supplier “partners” have been pushed into insolvency via payment terms, stocking policies, return or order cancellation policies which were unfairly weighted to the benefit of the Gorilla.

So I disagree with the blanket statement that customer demands are non-negotiable. Any thing is negotiable if the supplier is able to convincingly demonstrate that it is required to maintain supplier solvency and supply chain integrity and it is “Fair” to both parties. Too many suppliers are scared to speak with data to the big customers for fear of losing the business.

I’ll bet GS&A is complaining because the customer is the US Government. The general vision of the government, by many people, is that the US Government exists to make things fair. To regulate things. To help maintain freedom and liberty. I’m not saying this is true. But if they have this vision, then it would seem unfair to them for the government (of the people, by the people and for the people) to act like WalMart.

I’m thinking it is simply my government trying to spend my money wisely.

Of course the supplier relationship strategy was a lot more complicated than I could cover is a paragraph in a blog post – or even in this comment in response to yours. To elaborate a little further, I was not nearly as hard-nosed as I made out to be in the summary I gave above. The suppliers who were not already in compliance with the terms were told that I had a month or so to submit a plan to come into compliance, or to sit down with us to work out the best way for both sides to sever our relationship. There were a few that simply said no and were willing to walk away from us – mostly large companies whose sales to us were a small percentage of their overall business. Most came back with plans ranging anywhere from a few months to two years. We generally accepted any plan they offered so long as there were basic milestones along the way that could provide us with assurance that they were making progress.

As I recall, no one complained much about pricing or payment terms. The major concerns were the lead times and especially quality. Many of the suppliers wanted to come in and see how we were meeting our customers’ lead time and quality requirements, but few actually accepted our offer to go into their plants and assist them, although e put that offer on the table from the start. Those that did tended to be more interested in having our quality specialists help them than our supply chain people.

I think the key to the success of the approach – and we did realize an enormous improvement in the supply chain – was that we made the terms our customers were imposing on us completely transparent. They knew that we were not asking them to do any more or any less than our customers asked of us.

Great post, Bill. It’s easy to think of a big company like Walmart as an unfair player imposing impossible restrictions on the little guy. You show an alternate view in which they are a big company that simply demands excellence from their suppliers, and isn’t interested in coddling them until they get there.